Lead-Lag Live

Jeff Cullen and Cathy Howse on Dividend Strategies, ETF Insights, and Enhancing Financial Literacy

• Michael A. Gayed, CFA

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Unlock the secrets to strategic investing as Jeff Cullen and Cathy Howse from Schafer Cullen captivate us with their insights on the evolving world of dividend yield and its cyclical allure. Imagine institutional investors turning their gaze from high-flying large-cap momentum stocks to the steady allure of dividend-heavy plays. Jeff shares his excitement about Schaefer Cullen's venture into the burgeoning ETF market, while Cathy reflects on the firm's remarkable growth, all while upholding its cherished boutique values.

With a disciplined approach to value investing, Jeff and Cathy articulate the vital role of dividends in a portfolio's total return. They delve into the significance of choosing companies with strong cash flows and stable business models, illustrating how dividends can be a linchpin in long-term gains. As we explore the forecast for the 2025 market, they highlight the promising outlook for US equities and financial sectors, while also shedding light on the mechanics of covered call strategies to enhance income.

Finally, we demystify common misconceptions surrounding ETF liquidity and mechanics, providing clarifications that could benefit individual investors and financial advisors alike. Through engaging storytelling and educational dialogue, Jeff and Cathy stress the importance of understanding the reasons behind investment decisions, aiming to elevate financial literacy for all listeners. Join us on this journey to enhance your investment knowledge and empower your financial future.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Schafer Cullen and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

On the dividend yield side. It seems to me that that's very cyclical in terms of demand right Investors sometimes love stocks that are just pure momentum capital appreciation plays and then sometimes they go back to just wanting that pure dividend straight up yield play. Do you get a sense among the institutional investors that we're getting more towards a cycle where we just had two great years of large cap momentum, where there's demand for more traditional dividends to drive total returns?

Speaker 2:

We would say, yes, you know, we think that going forward, dividends are going to be a more important piece of return. They've been out of favor, as you mentioned, for the last, you know, two years. But we also kind of just look at where the multiple on the market is today. You know, over 20 times. That would imply that future returns are likely to be more muted, and so if that's the case, then that dividend piece is going to be ever more important.

Speaker 1:

This is a sponsored podcast, sponsored conversation by Schaefer Collin. We're going to be talking about power calls. Very good, deep dive on the education side of what in the world that strategy does and how it generates yield and why it's worth considering, depending upon what kind of environment we're in. Obviously, With all that said, my name is Michael Guy, a publisher of the Lead Black Report. This conversation, again, is sponsored by Schaefer Collin. Let's introduce our two guests here, Mr Jeff Cullen and Kathy Howes. Jeff, you first Tell me a little bit about your background and what do you do.

Speaker 3:

Thanks for having us, Michael. It's always good to be here and give the opportunity to kind of explain our firm and our strategies and kind of what we're trying to do, and also provide some education today, which I think will be nice for some of your listeners here. So by way of background, I've been in the industry for 30 plus years. I worked at various wire house firms. I actually started my career at Payne Weber when there was a Payne Weber, which is now UBS, but I started Wonderful WeHawk in New Jersey and it was a great firm to start with and since then I've basically been involved with mutual fund issuers, fund companies, investment management, broker dealers. Before I joined Schaefer Cullen, I actually worked for Merlin Bank of America running a lot of their SMA and fee-based programs. So when I joined Schaefer Cullen and Cullen Capital, probably about 13 years ago, we basically focused on promoting and kind of highlighting our strategies. I'm responsible for a lot of relationships to the research teams that we call upon at Merlin, Morgan Stanley and some of the people that give us recommendations of our strategies on these various platforms. I also do a lot of the lead work on product development.

Speaker 3:

So this ETF that we'll eventually talk about today. I actually partnered with two of my associates and we sort of made it together with some other partner firms. So that was exciting. The ETF space is growing rapidly and it was exciting to get involved with that. But our firm primarily is focused on separately managed accounts and mutual funds. So this is really our first foray into ETF. So I wear a variety of hats. At Cullen, as a boutique money manager, you tend to wear a lot of hats, which I see, and now I'm more involved with you. I see you running from hat to hat. You can appreciate that.

Speaker 1:

I certainly appreciate the hustle. There's a lot of things I'm going to ask you about, also, just in terms of the differences between SMAs, mutual funds and ETFs from an asset management perspective and client perspective. Let's go to Kathy. I said house. I should say house. Whenever I say house, I'm not actually thinking about my house. And whenever I say house, it's not I'm actually thinking about my house. I'm thinking about that show with the medical. It's a great show. You know it was a. Anyway, I don't think you're related to that at all, but, kathy, please, Unfortunately, no, unfortunately not related, no, but hi everyone.

Speaker 2:

I'm Kathy House. I'm actually one of a handful of what I call homegrown Schaefer Cullen employees. So I've been with the firm for just under 20 years, started in 2006. And I was hired originally to be Jim Cullen, our founder and chairman's executive assistant, and so I was very new to New York City and new to the industry and my job was really kind of supporting the office and supporting him.

Speaker 2:

But you know, four or five times a year Jim and I would sit together for several hours and write his market letters so he would dictate to me, you know, his communication to clients, his messaging about value investing.

Speaker 2:

You know, in those letters obviously he's, you know, talking about previous market environments recessions, bear markets, the tech bubble, and so that for me became really my introduction to the industry and I just learned a lot from really listening to him and hearing him kind of reiterate a lot of Ben Graham's principles and became indoctrinated as a value investor myself. So that became the beginnings of my career at Schaefer Collin. It moved into internal sales in New York City and then for the past 10 years I've been out in California and I cover the West Coast as our rep here. So it's been an incredible journey. We've had magnificent growth of the firm in the two decades that I've been here too. But I would say, really importantly, that a lot of that boutique firm values that I saw in my beginning days are still very much there today. I think that's something that kind of distinguishes us as a firm.

Speaker 1:

I am curious, since you talk about the communication aspect on the market letters is communication different by vehicle, meaning? Smas versus mutual funds versus ETFs? Do you find that the message that you're trying to get across? It tends to be different because the audiences are a bit different.

Speaker 2:

We don't really. I mean, we, you know we have a really nice mix of institutional and retail clients at our firm. So the messaging, whether you're in the separately managed account or you're in the 4EF mutual fund or in the newly launched ETF that we have, the messaging is very, very consistent. And even more kind of broadly than that, the messaging around value is very, very consistent. That's something that I think really is distinct about Schaefer Collin is that we have anchored ourselves to a discipline since our beginning days in 83. And we continually reiterate that it really doesn't matter how you access us, which vehicle it's it, but that consistency is really the key piece.

Speaker 3:

Things have also changed, mike. I mean when SMAs first came out it used to be $2 million for each individual separately managed account. I mean now we run these. First came out it used to be $2 million for each individual separately managed account. I mean now we run these things as low as $50,000 due to technology, so someone could have an account in a mutual fund that's actually larger than the SMA. There are differences between the vehicles, as you mentioned. You want to kind of cover and we can get into that. But yeah, for us the messaging is the same. We basically say the same message. The strategies for the most part are sort of run like clones of each other, so it just depends how the client wants to kind of have access to us.

Speaker 1:

Given the value tilt. I feel like, before we get too deep into anything, we should maybe define how you guys think about value, because there's a lot of ways that can be defined. How do you think about that term value when it comes to the portfolios?

Speaker 3:

I'd say that we define it as Kathy mentioned. You know Jim Cullen actually attended one of the final seminars of Ben Graham, so his philosophies that Ben Graham kind of left with was invest with the discipline, measure stocks by predominantly low PE ratios. But he mentioned low price to book ratios and you know, have a five year time frame. We also believe in incorporating any kind of stock that pays a dividend. So a lot of our strategies that we run are dividend heavy, meaning we have a focus on dividends. We want companies to pay dividends because a company when they start paying a dividend, it's really a problem for a company if they ever cut their dividend. So you're never going to institute a dividend unless you're really sure about your business and your cash flows and the growth there. So what we do from our perspective is we view value as kind of low PE investing relative to the marketplace right. So a technology stock doesn't have to have a low PE compared to a financial or an energy. But generally speaking, a good buy for us is a company that trades at 23 times earnings, has good cashflow and then they have a near-term hiccup and the PE ratio drops to 15. We can go in there and buy it at 15 and let them get back to their normal course of business Things that are happening in some of the large multinational companies that make warm beverages these days and have new CEOs. These kinds of things have dropped and have some appetite for good, stable businesses and cash flows, but they have a near-term hiccup and they might become attractive for us.

Speaker 3:

So it's low PE is the predominant characteristic, followed by dividend yield and dividend growth, and for us, if you just go after dividend yield, you're going to wind up in utilities and just consumer staples and things that had real estate. They pay great dividends and that might be what you're looking for, but they really don't have good, strong dividend growth. And then you can also buy strategies and other philosophies just to buy dividend growers. But you know a dividend growth could be a company that pays a penny and then the next time they pay two pennies, so you're getting dividend growth of 100%, but there's really no actual substance to that. So what we like to do is have a good dividend yield, say two and a half to 3%, and then have a company who's growing their dividend and that dividend growth is sort of tied to earnings growth. So that's where the fundamental sort of work comes in.

Speaker 3:

But what we're not doing here is kind of trying to catch a falling dagger, trying to find value trap. We try to avoid value traps. You try to avoid things that are maybe in distress and they should be in distress. So there's no real benefits from our perspective and our firm. So it's a little bit more tried and true steady, don't overpay for stocks, buy good businesses with good cash flows. That's sort of how we sort of view value Kathy. Anyone want to add to that?

Speaker 2:

Yeah, I mean just to kind of summarize we're not a deep value shop, for sure. I think a lot of our peers that are in the value space have probably stretched that relative term a little bit far, and so that's what we see. We describe ourselves really as that disciplined value, because it's not just looking at today's valuations, we're looking at stocks and looking at what are their 10-year average multiples, 20-year average multiples, to really stay in discipline to the value space.

Speaker 1:

On the yield point and then we'll get into some really interesting data that you've put together. On the yield point there's dividend yield and then there's yield that comes from other places, like buybacks and, of course, from the options side of things, selling options On the dividend yield side. It seems to me that that's very cyclical in terms of demand right. Investors sometimes love stocks that are just pure momentum capital appreciation plays and then sometimes they go back to just wanting that pure dividend straight up yield play. Do you get a sense among the institutional investors that we're getting more towards a cycle where we just had two great years of large cap momentum, where the demand for more traditional dividends to drive total returns we would say yes, we think that, going forward, dividends are going to be a more important piece of return.

Speaker 2:

They've been out of favor, as you mentioned, for the last two years, but we also kind of just look at where the multiple on the market is today over 20 times. That would imply that future returns are likely to be more muted, and so if that's the case, then that dividend piece is going to be ever more important. It's not something, obviously we cycle in and out. Of. It's a discipline that we stick to all the time. But to your point, yeah, we see investors kind of change their mind on whether they care or not about dividend yield. We know history has told us, though, that you look at 40, 50 years of data that it does make up about 40% of the S&P's total return, so keeping that long-term is pretty important.

Speaker 3:

It's also a timely thing. Right now you can get a 5% CD, so why would you maybe invest in a 3% dividend stock, unless you hope for appreciation? So, as the 10-year treasury maybe eventually comes down even though we're sort of rallying at this point in time dividends become sort of important. They're also the tax treatment of dividends becomes really important for end clients. In the whole scheme of things, you know, qualified dividends are treated at a lower tax rate than ordinary income. So, yes, you're buying a CD for 5%, but all that's ordinary income, I think for us too.

Speaker 3:

We would just say that we we focus on doing what we say we do because the Michael Guy ads of the world who invest with us. You might be blending us with a large cap growth fund and a technology ETF and a financial ETF. So what we try to do is tell you what we do. You figure out how it works inside of your portfolio, instead of saying we're going to be the one thing that you own. We are most used at our institutional clients and our high net worth investors as just a piece of the portfolio.

Speaker 1:

By the way I did randomly research this some time ago there are apparently only three Michael Guy ads in the US. It's a combination of words that's a little bit odd. All right, let's give you some of the data that you've consolidated. You and I were chatting and you had mentioned that this exercise of going through all these different forecasts from various large firms with their own research on what markets are likely to do let's talk about that First of all. Why even do that as a study to see what the street thinks? Is there a lot of variability across the different targets? Any kind of context there would be interesting.

Speaker 2:

So you know this is a practice that we've actually done for a couple of years now. You know, over the holidays you've got all of Wall Street's brightest minds coming out with their year ahead outlooks, and so what we do, we take the time to actually go through and read each one of them and what we try and do is extract from that some of the key takeaways from both kind of an economic viewpoint and also an asset allocation viewpoint. So we're pulling out some of the key statements that they have around their views of US equities, international developed emerging markets. Obviously, rate cuts are a big topic still. So you know what are their predictions for cuts for the next year? You know these firms have a target on the S&P 500 and kind of an earnings growth projection.

Speaker 2:

We like to take all of that, summarize it and then kind of scale out for a second and see, you know, where is the kind of consensus coming together.

Speaker 2:

And it's been really interesting because if we kind of go back a few years ago you know, going into 2023, after having been through a pretty ugly market, a lot of them had, you know, a kind of negative call for recession. 23 turned out to be a really positive year Last year. You know, going into the year a lot of the strategists had kind of more of a neutral stance and once again it was a pretty positive you know, overwhelmingly positive year, and so, having done this practice just recently, we see that there is a kind of overwhelming positive tone for 2025 and kind of a lot of great expectations, I would say, ahead. So you need to have a lot of firms with price targets over 6,500 on the S&P, earnings growth over 10%, looking for a pretty bullish year for US equities ahead. But we like to do this because it saves our clients a lot of time of going to read through each one of these pieces and it's something that we are happy to share with anyone interested.

Speaker 3:

If people anyone who's listening here is interested to share with anyone interested. If people anyone who's listening here is interested, we can send this to you. Send an email to info at cullenfundscom and we can share it with you. Kathy, what would you? I know we read through all these pages here. What would you say was sort of the highlights for people? I know there's a range of the S&P, but it seemed to be kind of on average, people are expecting 8% to 9% up. And then also, what sectors? Do you think that what drew out from our sector analysis too?

Speaker 2:

That's kind of one of the more interesting takeaways there's. You know you have a lot more in favor of financials over the next year. Tech is still, you know, a pretty positive sector, and then it gets kind of mixed in some of the defensive areas. There's somewhat of a negative view around staples, but it's really interesting to see financials really come out as more of an overwhelmingly positive tilt for 2025.

Speaker 1:

I think it makes sense, though, right, because, with deregulation being a buzzword, right, you think financials should be a big beneficiary from that perspective and, let's face it, tech has been such a phenomenal winner you would think there's going to be some degree of mean reversion, which should favor value from a pure sector definition perspective more than growth this time.

Speaker 2:

Yeah, certainly. I mean, you know, even since the election you've had, you know, the sort of the Trump rally come and go a little bit, but banks have really held in there over the last two months, and so I think that that's what we're hoping to, that with financials having kind of more of a focus, that that's going to hopefully spur a little bit more of a shift of broadening and shift of value too.

Speaker 3:

Yeah, one point I'll make to you, michael, is a lot of people have invested in growth and they might own the iShares Russell 1000 Growth Index. When you kind of go into that index in detail you'll find that there's really not a lot of financials waiting in the index. It's actually 6% and I actually looked at it before this podcast, and two of the positions are Visa and MasterCard are three of the six. So you really don't have a lot of exposure to any banks. If you just look at this week's earnings reports by B of A, jp Morgan Citibank, I mean there was a really strong rally and this is all before the anticipation of deregulation and increasing in mergers and acquisitions that could happen and really boost financials. So the financial exposure in the Russell 1000 value index is about 23%. So again, if you're only a growth investor, you're sort of not maybe as exposed to financials as maybe you think, and that's where us as value managers spend a lot of time in those spaces.

Speaker 1:

And it goes back to also yield, because financials tend to have pretty good yields anyway, right, so there's a component of that. So I mentioned earlier that there's yield from buybacks, yield from traditional dividends, and then, of course, there's this added yield that comes from selling options. So I want to do a deep dive here into this proliferation of covered call strategies which are designed to juice yield very high level right before we get into the fund. More specifically, I think it's fascinating. I mean, these types of strategies. It's not like it's new, it's been around for a long time.

Speaker 2:

It's just got a lot more attention as of the last year and a half, two years. First of all, mean to your point, michael. It's always a good practice to be sure that investors really know what they're investing in the strategy that's being employed. So covered calls are pretty straightforward, but there's new terminology that gets introduced and there's certainly risks and trade-offs that I think really need to be understood. So we're gonna take a few minutes here to kind of review. If you are an experienced option trader, you might skip ahead, but for those here live, this will be a nice refresher for you. So we kind of need to take a step back before we step forward and just kind of talk about well, what's a call option? So, by definition, a call option is a contract between a buyer and a seller where the buyer has the right, but is not obligated, to buy a stock from the seller at a preset price. We call that a strike price on or before a specific date. That's called an expiration date.

Speaker 2:

Now, in a covered call, this is a trading strategy where the investor takes the position as the seller. We also might call that the writer of the call option on a stock that they already own, and this is a strategy that's used to generate additional income in the form of premiums, and that's what you've received when you sell the call option, all right. So let's take a look at this first. So to employ a cover call, you first have to own the stock. So here's an example An investor first purchases at least 100 shares of ABC stock All right. The investor then sells were they right a call option on their 100 shares and they receive an option premium. So this is how this transaction actually looks. We, again are the seller of the option. The amount is one Now one represents the number of contracts and the contracts are on 100 shares of stock. This is on the stock that we own, abc, and it has an expiration date of January 17th 2025. Today this is a third Friday of the month. Options always expire on the third Friday of the month and so, again, the expiration date is the date at which the contract will expire. We're selling this at a strike price of $105. Now, the strike price is the price the stock owner us will sell their shares to a buyer, and again, it's a call. That's just the type of option. We receive a premium for doing this. Now, the premium is the amount the seller again us, receives from the buyer for each contract. So in this example the premium is $1 per share. Now this is again on 100 shares of stock. So selling this call, we're receiving $100.

Speaker 2:

Let's take a look at it in an illustration. Okay, so the first thing we did, we purchased our shares of stock at $100 and then we sold our call at a strike price of $105 with an expiration date of January 17th. The contract buyer on the other side of this, they have the right to exercise the contract at that strike price, on or before the date. Now two additional terms get introduced here in the money and out of the money. If the stock price rises above the strike price, the option is then in the money. It's likely that our buyer is going to exercise their right to the option if the stock moves in the money. If the stock price stays below the strike price, the option is out of the money. Okay, so there's a number of outcomes that can occur trading options. Here's the first one Our option gets assigned. This happens if the stock price rises above the strike price. Again, it's in the money. The buyer may exercise the option and you must sell your shares at the strike price. You keep the premium, but you forfeit any additional upside beyond the strike price.

Speaker 2:

Okay, our table has kind of a breakdown of what's occurred here. So again, we first bought our stock 100 shares at $100. We have a $10,000 position. We sold the call, we received a dollar per share of income, we received $100 of premium income, and then we got assigned in our option, where it was exercised, and we sold at $105. So we sold for a total of $10,500. Now what's occurred? We got an income of 100, a gain in the stock of $5 per share. So we've made $500 in a gain for a total of $600. Let's say that on expiration though, the stock price was 110. And we never did this call in the first place. We could have sold the stock that day and made a 10% gain or made $1,000. That's the risk that we took. That's the trade-off for receiving the income that we took. So that's something that investors need to be aware of is that you're limited as far as where the price of the stock can move to the strike price.

Speaker 1:

Can I just interrupt you for a second Because I think and I'm sure you're probably going to address this a little bit later but yeah, when I think about options, I think about volatility and how volatility impacts premiums. Yeah, talk about that from the standpoint of the seller. Meaning is it fair to say that you want to see, or be selling into a higher volatility regime because the premium is larger than at that point?

Speaker 2:

to a higher volatility regime because the premium is larger than at that point For us, yes, we would say that when there's higher volatility, the option premiums that we're receiving are likely to be higher. When there's more movement in stock prices, then there's more potential for outcomes, right, various outcomes. So in a more high vol market you would. I would caveat that with one of the things that we don't do at Cullen is sell calls in very oversold conditions. So when prices fall dramatically, we don't get excited and start selling calls, because what typically happens you might have some rebound days that are there. We like to sell calls where there's some sort of consolidation in the stock price and be really kind of aware of the environment.

Speaker 3:

Michael, I'd also add to that point. Here is the volatility we take into account, right. So if there's more volatility and there's a good chance that the stock in this example that Kathy gave you know if we thought the strike price or the stock price was going to kind of fly up to 120, we're probably not going to write on that stock. We're confident that stocks can appreciate. But the volatility helps us get a higher premium. So if there's as easy a chance of it going to 120 as it is to go 80, instead of us writing it for $1 premium, we might say the premium is $1.50 or $2. We're asking the buyer of the option to pay up a little bit more for that potential of larger outcomes. So the volatility sort of allows us to increase the premiums that we're able to write out there.

Speaker 1:

Typically on average. I know it's hard to say. It's like you can drown in a pool that's, on average six feet deep right, but on average how much extra yield comes from selling and doing the covered call strategies?

Speaker 2:

Well, we'll get into that in our strategy, but, just generally speaking, we're writing short dated calls, you know, typically monthly covered calls. We're looking to capture about 1% of premium income for every call that we write. So you know, take that 12 times a year, you know you could be generating 12% of premium income. Jeff's going to explain, though, that we really we choose to not write on every single stock in our portfolio because, to your point, you know, if there's momentum behind a stock, we'd rather see it appreciate. So we pick and choose our spots to do so. So that brings our total premium income that we're generating down, kind of weighted, to writing on about a third of our portfolio.

Speaker 2:

We'll get into it further, though. Or let's just go through, kind of the two other outcomes and then we can kind of dive further in. So the other outcome is that if the option does not get exercised by the buyer, if the stock price stays below the strike price, the option is likely going to expire, and we keep our premium, we keep our shares. So we haven't realized anything as far as the stock goes, but we pulled in the additional premium income selling the call. So we've made-.

Speaker 3:

These are our scenarios. By the way, these are our favorite scenarios.

Speaker 2:

This is our winning scenario. This is, yes, this is what we strive for. And then, finally, you know, if the stock price falls below where we originally purchased, that premium that we received selling the call can help offset part of that loss. So it's only to the extent of the amount of the premium you know. So, again, if, let's say, the stock price at expiration is $99, we've got a 1% loss that we haven't realized, but we also pulled in that 1% or $100 of premium income and it's keeping us flat for right now. So those are three outcomes that happened.

Speaker 2:

The last thing I'll say is just, you know, in order to trade options on your own, or even work with a manager on your behalf, you know there's a required option agreement that goes to help identify your goals and your financial. You know experience, trading suitability, all of those things, and there's kind of a tiered system that's employed. Covered calls is at the bottom of that tier because they are considered one of the more basic option strategies, but it's just something you know for investors to be aware of yield is being generated, but then the way the performance characteristics alter, right.

Speaker 1:

So as I understand it, down capture is less the moment you employ a covered call strategy against the same asset without the covered call strategy, because you've got an out cushion from the yield and income component. So if my understanding of that is correct, is it fair to say that for asset allocators they should be thinking more about covered call overlays towards the tail end of an extended bull market, because it seems like that's kind of where it gets to be interesting?

Speaker 3:

Well deploying strategies on what you own. There's so many different strategic ways to introduce options. There's so many different strategic ways to enter into these options that it's just a hard question to sort of answer for us, because the way we do it and where we run it is we focus strategy to generate income. So what we're trying to do is be part of someone's strategic allocation that says I have this amount of money in my allocation I'm applying toward fixed income, whether that's cash bonds, mutual fund bonds, etf bonds, mutual fund bonds, etf bonds and you might say, for a little bit more risk, by buying dividend-oriented stocks. I can get a 6% to 7% yield coming in monthly, obviously an annual basis, six or seven coming in monthly. So you kind of augmented me a part of that allocation. So there's different ways to do it and what you'll find is when you dive into the covered call space on ETFs, there's all kinds of different strategies that people run. They're doing options on the index. So I'm going to take a step back to answer one of your questions, which is our strategy.

Speaker 3:

In what we call our separate managed account form, which we'll reference on some of these slides, we've yielded between 7% and 8%. We're writing on a third of the portfolio. To break that down, I'll give you a preview. Here is a little more than half is coming from dividends and the other half is coming from covered calls. Well, here's a slide on it.

Speaker 3:

So this is a look back at our separately managed account actual portfolio, what the dividend yield has been per year From 2011,. We started to run it until 2024. You can see that we've been consistently above seven. The blue line is how much has come from dividend income very consistent and the other is from options, premium, which will fluctuate depending on the volatility, michael, you talked about et cetera. Now could we make this 12% yield, probably, if we wrote on 100% of the portfolio. But when you do that, you're almost most of the part giving away every upside you have on the positions that we have in the portfolio. So you can generate income, but you'll find that the majority of it is coming from premium income and you sort of limit a little bit of the upside capture because you're sort of being called away pretty often and we know this because we sort of tried it. You know we've tried different things. We've kind of settled in on this 25 to 40% writing on which I'll again, I'll cover when- we get there.

Speaker 1:

I think it's actually a very it's a great visual to show the attribution from that perspective. Let's talk about the ETF a bit. First of all, the impetus for launching the ETF. You already have a successful managed account business mutual funds you mentioned. Why go into the ETF?

Speaker 3:

world. Let me just give a quick background about what we're talking about to all your wrestlers, because you sort of haven't even mentioned the name of that strategy.

Speaker 1:

Well, I'm trying to get them to be excited to hear, because they're waiting for it.

Speaker 3:

The strategy we run in separately managed account is called the Schaefer-Cullen Enhanced Equity Income. Separately Managed Account SMA it's called. We have a mutual fund version of it and we have an ETF version that we launched. The ETF version is ticker symbol, divp. So DIV for dividend and P for premium. So DIVP is the ticker, and then we have a mutual fund version as well.

Speaker 3:

Now the strategy what we do is we buy between 30 and 40 large cap multinational dividend stocks that we don't overpay for. Again, it's our version of value that we measure by low PE. Right now it's about 32 stocks in the portfolio and then we selectively write covered calls on between 25 and 40% of the portfolio for additional income. What we're looking for is exactly what Michael said, which is a volatility. We own stocks in every sector, so there's always something going on. If healthcare is in the news, there's some volatility in some healthcare names and that might generate good option premium for us. If there's a flare up in the Middle East and the price of oil starts to fluctuate, there's some good volatility. That happens in energy. Right now we just had a really robust earnings reports from financial stocks. All that's to the upside right Stocks, that kind of pick, but it gives you some volatilities and then you're going to have some selling, probably in some of these names create some volatility in the name, so we might decide to write on it. What we try to do is all these stocks pay dividends. So when a stock is going to pay a dividend, we want to make sure we capture the dividend first and then, if we think it's slightly overvalued or it's a good time to write on it or we can get a good option premium, we might write a half a position on that. So if I own, let's just say, abc stock, instead of writing on the whole name and maybe getting a called away in Kathy's example at 110, I only write on half the position. So half it goes up, I still own it, and the other half it gets called away and I get the options premium income. And we do this over and over and over again. Now what we're writing is short-term dated between two weeks and a month options, always out of the money from a premium perspective, and what we found is the longer you go out, you're almost giving too much exposure to the stock actually performing well. Because we buy the stock first, we never look at the options market and say what's attractive. Then we go I want to write an option there, go, pick the stock. It's always we pick 30 to 40 stocks, first from a valuation bottom-up perspective and then we give that to the options portfolio manager who looks for good options premium in the stock's. So we do kind of over and over again.

Speaker 3:

Now in the separately managed account format because, kathy explained, when you do a contract you have to have a hundred shares. The separately managed account assets per account for us have to be $250,000 per account, so it becomes a little bit larger and also to retail people who maybe are not working with a financial advisor. The separately managed account really isn't available to you. So there's been strong demand for us to make this strategy into an ETF that trades on the New York Stock Exchange under ticker symbol DIVP and anyone can buy it, whether they're a financial advisor, they're a RIA, they're an individual client and make it a part of their portfolio the ETF we launched in March of this year. So when you look on our website or you look at the tickers, you're not going to see a full year dividend options payment received yet because you have to almost hit a year's track record before that calculation hits Bloomberg and CNBCcom to show what the projected yield is going to be is going to be.

Speaker 3:

But the ETF is run as a clone of the separately managed account. So that SMA long track record we showed you of dividend and premium income is going to be that amount minus the ETF fee of 55 basis points. And that's what you should sort of expect from this strategy going forward. And again, for us it's a part of the allocation pie. Maybe it should be in your fixed income bucket because we're running this thing for income generation first and then total return second. So, michael, to answer your question and come back on it, it was really demand from advisors who asked this for us. They said look, right now we manage $1.8 billion in this strategy as a firm and we didn't have an ETF. And FA said look, I'm using ETFs much more. It's easier to use for asset allocation purposes. I don't have to do dual contracts. Estimates are a little bulky for me. Can you make an ETF version? And we did.

Speaker 1:

Historically on that 25, 40% that the covered calls are being run on. Do they tend to? Are there certain sectors or any kind of commonalities through our time in terms of sort of where the management team decides? This is where we should sell the cover calls as far as the underlying holdings or the industries or sectors?

Speaker 3:

Yeah, kathy, you can add to here. We have two disciplines. So again, we pick the stocks first. Once the stocks are done, they're given to the options portfolio team. They're looking for two thresholds that we have. We're looking to get a certain amount on an annualized basis. If we just get the options premium, someone pays.

Speaker 3:

There's really two components of the total return here. One's called the options premium income. So if we sell the option, if the stock's $100, we sell it for a dollar, we get the dollar and the stock stays at 100 and doesn't get called away. That's options premium income return for us 1%. So we like that number to be at a certain level for us to write on it. And the other one is called the options call return, which takes into account if we own the stock at 100 and we get the strike price is 105 in Kathy's example, that's 5% appreciation for us. So 5% appreciation plus the 1% we got for the call option at six.

Speaker 3:

We want that to be a certain level in appreciation for us. So 5% appreciation plus the 1% we got for the call option, that's six. We want that to be a certain level in order for us to write on a stock. We don't disclose what those levels are, but they have to be really attractive for us because we're buying the stock first because we think it's going to go up. So we're not running this just to generate options premium income. We want our stocks to have good total return and we have to be willing to get paid enough for the RN client to be willing to give up a portion of the stocks that we did our research on.

Speaker 2:

I would add. Well, to kind of directly answer, there hasn't been like a standout sector over the let's just call it, you know, 13, 14 years we've run the managed account we have. You know, today we have 32 candidates to look at every single month as to what presents the best opportunity to write calls. Okay, and that alone, I think, is a big differentiator between us and a lot of our peers that do index-based options. They're kind of reliant on, you know, the S&P 500 and the volatility that's there. That's going to pay that premium. We have a lot of flexibility to kind of go around our portfolio and be selective and, as Jeff said, there are things that, month to month, prevent us, whether it's an approaching ex-dividend date, an earnings date, you know, and even like some valuation or market environment considerations to be aware of. So we move around the portfolio throughout the year.

Speaker 3:

We change our vendor line names about 10 to 15%, so-.

Speaker 1:

That's the turnover right.

Speaker 3:

Yeah, turnover is about 15%. So I mean, our lovely scenario here is we own again ABC stocks. I don't want to name particular companies, but we own ABC stock and we want to remove it from the portfolio. We write an aggressive option, we get a call away from portfolio, we get the options, we take the cash and we go buy another value stock. So again, we run about 10 separately managed accounts at our firm in all kinds of different styles. So we have lots of backup names that we cover and own in different portfolios that we're happy to put into this particular strategy. So there's always good choices. It's not like we have 80 and we're struggling to find new names and we have 32 names. It's not that many that we focus on, but getting those dividends is kind of key. So I just want to add that piece.

Speaker 1:

Yeah, and I would think that correct me if I'm wrong you probably in a more traditional bear market. It gets to be even more interesting in the sense of now you've got more names that are in the value camp because they've gotten decimated from the bear market, and then on top of that the cover call writing because the volatility of bear markets results in even more yield. So that's, I got to imagine that's sort of the real dream scenario to some extent to really get things juiced up.

Speaker 2:

Yeah, choppy markets, sideways markets, bear markets, tough years. I think that's where you see that additional protection, downside protection, from both the dividend component and the option premium component that's built on top of that. That help offset when prices fall. But that's also those environments are also heightened volatility, tend to garner more option income too.

Speaker 3:

The other thing we find too, michael, for clients who've owned us for a long period of time, is the stocks we own. They pay dividends, but they also have dividend growth and while we might change the name 10%, we might own stocks in here for 10 years, came in the portfolio and yielded 4%, and they're growing their dividend 5% or 6% or 8% a year. Every year, on your original cost basis, your 4% yield might be yielding 6%, 7%, 8%. So we see that on your original investment, if you stick with these kinds of strategies over time, the amount of income that's actually generated isn't this steady 7% or 8%. That's what comes in every year if you buy every year, but if you own it for a long period of time, the dividend income has been growing, compounded for people.

Speaker 1:

Since you mentioned that point about more like a fixed income complement or substitute, how much do you typically see of advisors, kathy, on the sales market side, what you're hearing from other institutional advisors that are allocating? I mean, are they putting half the fixed income bucket 10% towards? I mean, what sizing do you see?

Speaker 2:

It really depends on the client. But I will say that we've seen transitions out of traditional fixed income into this type of strategy. We've also seen just more recently people moving out of treasuries into this because you know the yield is competitive. The 7% plus yield you know, even in still a relatively higher interest rate environment, is something you know that clients want to hear about. So I would say you know it's still equities at the end of the day, you know there's bond-like characteristics here with the steady income and if you were to hold this you know type of portfolio for five, 10 years, you would see that preservation of principle. But the point is is that you know we want to invest in good companies, equity companies that do have some you know steady capital appreciation or growth over time as well.

Speaker 1:

I feel like we should hit on a little bit of the mechanics of an ETF, because I think still to this day people confuse volume with liquidity. So something's fairly small and UFund has 5, 10 million of assets that are management, they think, and it's not trading. Often Investors and traders shy away from it because they think, oh well, I want to be able to get in and get out without getting crushed on the bid-ask spreads. Let's debunk that, jeff.

Speaker 3:

What you'll find here is exactly what you just said. Because an ETF has low volume, it's not a stock. It trades like a stock, but it's actually a fund. So the way to think about it is there is a person who's our partner in this particular ETF, who's a lead market maker, and their job is to create liquidity that exists out there. So let's just say that there is a bid ask of, let's just say 25 to 26. Let's say it's a wide spread, for it's not a good example. Let's say it's 25.50 to 25.60. So it's a nice tight spread. The lead market maker's job is to sort of keep that tight 50 to 25, 60. So it's a nice tight spread. The lead market maker's job is to sort of keep that tight and we track to make sure that they keep that tight. And we do that by basically providing them all the information we have on our holdings every single second, so they're able to keep the spread because they know exactly where the spread is.

Speaker 3:

When someone comes in and buy let's just say, the average daily volume for some reason was a thousand dollars a day, So,000 shares a day very low and someone wants to come in and buy 10,000 shares your immediate reaction is like I'm going to move the market.

Speaker 3:

You're not going to move the market. What happens is that 10,000 shares goes into whoever you trade through Fidelitycom, Schwabcom, whoever it might be wire house firm. That trade is then routed and all that happens behind the scenes is our lead market maker creates more shares and gives you 10,000 shares based upon the spread. So there's this whole what's called a creation bucket and a redemption bucket, and when new shares are needed, all they simply do is make more shares. So it's almost like a mutual fund. When you go out and you buy a mutual fund, at the end of the day at four o'clock, the mutual fund company issues more shares and gives it to you. This is the same process that's happening just throughout the day, with the lead market maker giving it to you. Now there's a few caveats that I've learned over the last three years being involved with ETFs. I've been told that it's not an ideal situation to either buy a half hour after the open or a half hour before the close, simply because it's-.

Speaker 1:

I've heard the same and I don't really see any evidence of that, but it makes some sense given the way the market maker, AP, is working right.

Speaker 3:

Yeah they talk about it's like the beginning stage is a little bit of an auction market, so it's not where the lead market makers sort of engage. So the advice that we had been given and people should make their own choices here, but sort of buy an ETF somewhere between 10 o'clock and, say, 3.30. Try to avoid the half hours before and then also this is sort of important, I've heard this over and over and over again it's just do a limit order, right. So if you see that the price is 25.50 and 25.55 ask, just put a limit order at 25.55. So limit orders are sort of your friend. This way you're making sure you're never going to be gapped up for some errant reason.

Speaker 3:

But it shouldn't be the case. It could be the case if you're dealing with micro-cap stocks where the lead market maker there might be a lot of volatility in the underlying names and they're not marking to market. So there could be there. But for what we do, we're buying these huge, large mega-cap stocks. They don't fluctuate too much in any particular day that they can't keep a tight spread on. But that's the advice that I've always been given, doing this now for three years Avoid the beginning and the end, get in the middle and use limit prices and everything really works fine. I've been buying this ETF on a daily basis because I want to see exactly the experience clients have, and that's the way I do it. I'm getting really nice pricing.

Speaker 1:

For those who want to learn more about the IVP and, just in general, the firm, obviously they can go to the website, but what are maybe good places for people to just further educate themselves around dividend strategies and, again, what you ever call, in particular does?

Speaker 2:

Yeah, well, I mean, our website has a lot of information. You know, the market letters that I mentioned, Jim writes, are also a really great tool that kind of communicates our philosophy and our sort of long-term approach. We're also, you know, happy to spend one-on-one time, you know, with advisors and individual clients to go through our strategies, our process, et cetera. So, you know, certainly feel free, you know, through Michael, to reach out to us to engage. And you know, like I mentioned at the onset, you know we are a boutique firm. You know there's about 60 employees at Schaefer Collin. We manage about $23 billion, though, but we still have that boutique feel in which you can get access to our research team, our portfolio managers, and we welcome you in our New York office also. So there's a lot of great ways that you can kind of access us to get that education piece.

Speaker 3:

Yeah, some of our core strategies, michael, is this strategy we're talking about the enhanced which is based upon our flagship strategy, which is called our high-dividend strategy what we do. We manage money in international markets and emerging markets. We have a super, a really strong performing emerging market fund now, so we have a lot that we can fill an advisor or a client in. So I would say, go to our website. You can email info at cullenfundscom. That group has been instructed to pass those leads on to Kathy and I for follow-up. You also can find our direct contacts and emails right on our website, so feel free to shoot us a note. As Kathy said, we're available. That's our role here is to tell our story about what we do, and we're happy to do it and we're very happy for having this kind of audience that you have, michael, to sort of get that message out more broadly.

Speaker 1:

Yeah, I love the education side of it because I think that's missing from a lot of conversations around where to invest. It's like where to invest is one thing, understanding what you're investing in and why is a whole different type of communication that needs to be, I think, more out there. So I appreciate that Everybody that watched this live. Make sure you check out DIVP Again. This is a sponsored conversation from Shaver Collin. Hopefully we'll be doing more of these on a monthly basis with both Kathy House as opposed to House and Jeff Collin and appreciate those that watched you. Thank you everybody, thank you.

Speaker 2:

Thank you.

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Michael A. Gayed, CFA

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